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Charles Arlinghaus: Gov. Hassan has to cut spending right now

BY CHARLES ARLINGHAUS

Every two years in New Hampshire we have a budget crisis. No budget seems to be easy. This year, a new governor has been welcomed to office with problems that demand she take action long before the official budget is even adopted. She has no choice but to take immediate executive action to cut the existing budget and then put on hold any new or increased spending for another two years.

The state budget law allows the governor to issue an executive order with the approval of the legislative Fiscal Committee in the event of a revenue shortfall and likely deficit. Doing this is not unusual. Every governor in the last 30 years has been required to do it.

New Hampshire's two-year budget will end in deficit if no action is taken. While revenue is coming in ahead of budget in general, there is a problem with the Medicaid Enhancement Tax (MET). The MET will likely end the year $36 million behind schedule. After accounting for a 2012 surplus, revenue ahead of projection in other categories, some spending savings, other savings that didn't materialize, etc., the problem is a little smaller, but the state still faces a $25 million deficit.

The MET was inaugurated as a sort of pass-through, pretend tax to dragoon more Medicaid money out of Washington. Hospitals paid the tax, the feds matched it as Medicaid spending, and hospitals received all of it back the same day as a grant that just happened to match what they paid.

Some changes were made because of Medicaid rules, but then in the last budget the pretend tax was turned into a real tax. Hospitals didn't get the money back. This created an incentive for them to actually care about how much they paid and to structure their finances - in the same manner as any other taxpayer might do - to minimize their liability and conduct business in a way to help their bottom line not the state's bottom line.

This is perfectly rational and predictable behavior. But it left the state with less revenue.

Fortunately, state law provides a solution. The governor can and should immediately issue an executive order curtailing $25 million worth of spending (about 2 percent of the annual general fund budget). Making adjustments to spending in the final six months of the two-year budget cycle is something every governor has to do. If she does not, then by state law those cuts must be part of the budget she proposes on Feb. 15.

Whatever she chooses, we have long known that the Medicaid enhancement revenues were unreliable. When Gov. Craig Benson vetoed the budget 10 years ago, one complaint in his veto message was that the state needed to reduce reliance on the MET for stability. Many people who disagreed with the veto itself agreed with his warning.

The state budget has problems when revenues are unreliable or vary a great deal. The MET is a problem especially now that hospitals can and should treat it as a normal tax. In addition, the federal government, which keeps threatening to repeal the loophole that allows it, is under great financial pressure.

Ideally, that revenue should be used not for general operating expenses, but for one-time, non-recurring expenses. The state should wean itself, or at least its general operating expense budget, off the MET over the next four years.

It also should serve as a warning for other revenue enhancements being considered. One-time or otherwise unreliable revenue sources should not be spent on annual expenses like salaries or ongoing programs.

Lawsuit settlements are a good example. If the state settles a lawsuit for tens of millions of dollars, that money cannot in good fiscal conscience be devoted to expenses that continue indefinitely. Fix a bridge or pave a road, perhaps, but don't use it to hire a permanent employee you can't afford when the windfall runs out.

We had a huge deficit, and therefore budget crisis, two years ago because we borrowed to spend or spent money we hoped to get but didn't. (In 2010, we budgeted and spent $60 million from "sale of state assets." Three years later, we're still at zero in that account.) We have a smaller problem now because of an unreliable revenue source. Let's avoid both mistakes.Charles M. Arlinghaus is president of the Josiah Bartlett Center for Public Policy, a free-market think tank in Concord.